Money Growing: Vying for Businesses and Travelers

“Given large passenger flows they generate and good transport accessibility, major airports are good venues for development of commercial real estate – restaurants, cafes, fast food outlets, shopping complexes and amusement facilities, galleries, etc,” says Yevgeny Semyonov, deputy head of financial markets and investment department at Knight Frank.

“The most successful projects are shopping, entertainment and lodging facilities catering to individuals, as well as offices and warehouses for companies involved in cargo transportation services and import-export operations,” adds Andrei Zhamkin, senior commercial real estate consultant at Blackwood.

Anchor in Itself

Air terminals play the role of a center of attraction for commercial property projects within the airport zone, analysts believe. Andrei Zhamkin says that an airport itself should be viewed as an ‘anchor’ for other projects. All Moscow airports have announced plans to build new terminals or refurbish existing facilities.

Anna Zakharenkova, spokesperson for Sheremetievo International Airport, has reported that all the existing terminals will undergo reconstruction. Germany’s Hochtief – general contractor for the project – plans to build a new international airport complex Sheremetievo I, measuring a total of 40,000sqm. The new building will emerge next to the existing terminal and will serve 1,500 passengers arriving or departing on international flights per hour, or 5 million people annually. “The new international terminal Sheremetievo I will be launched in late 2006. The building will be remarkable for modern design, featuring orange-blue and silvery colors. Interior design will follow a uniform style. The new Sheremetievo Airport facility will be ready to entertain passengers on the New Year’s Eve,” Anna Zakharenko says.

Reconstruction works at Sheremetievo II terminal will begin in 2007. The area of the terminal will be expanded by 140,000sqm, raising its carrying capacity to 18 million passengers per year. Meanwhile, the development of Sheremetievo III terminal has already been launched. The new airport complex will serve 9 million passengers per year, providing a multi-level parking facility with 3,500 car spaces, entry driveways and flyovers, taxi channels and parking spots for 32 airliners. The terminal is slated to be commissioned in November 2007.

Vnukovo Airport unveiled its plans to launch a major overhaul of its facilities in 2003. The project, estimated to be worth approximately $1.3 billion, is expected to increase Vnukovo’s carrying capacity to 20 million passengers per year, according to the airport’s press service. As part of the overhaul, a new 5-storied terminal designed by the German firm Obermeyer Planen and measuring a total of 201,000sqm, will be built. The terminal will feature a 500-meter long boarding gallery. Underground facilities will be linked to Vnukovo’s train station and will provide luggage offices, express check-in stands for passengers who arrive at the airport by train from Moscow. The first and the second floors of the terminal will service arriving passengers, while the third floor will be reserved for departures. The fourth floor will house facilities catering to VIP passengers, government officials and delegations. The new terminal will be divided into two large zones for international and domestic flights. The complex will provide two restaurants with panoramic views, offices of airline companies, ticket offices, travel agencies and information desks. The development of the first phase of the terminal, measuring 174,000sqm is to be finalized by early 2008.

The main terminal of Domodedovo airport measures 112,000sqm, a spokesperson for the airport operator -- East Line -- has reported. By late 2006 it will be expanded to 220,000sqm. Thus, the passenger flow will grow to 16-18 million per year. Arrivals and departures zones will be increased and over 50 new shopping and leisure facilities will be launched on the premises, including restaurants, shops, recreation zones, a movie theater, etc. East Line Group has ventured on reconstruction, defying a prolonged conflict with the Russian Property Fund. The company is locked in litigation with the fund over the validity of its leasehold. The amicable accord still has not been signed. Some market operators believe that given these circumstances long-term investment is fraught with high risks. Others believe that it means East Line is confident of success.

“Terminals under construction at Moscow airports meet market standards. Most Russian airports service international flights. The larger is the airport the more cargo flights its serves, which means the complex must provide enough storage space,” Igor Galitsin, general director at Becar Commercial Property, says.

“Renovation of existing terminals and development of new facilities, that form the core of the airport offers new investment opportunity for development of airport infrastructure and surrounding areas. An airport offering cargo transportation services is a center of attraction for warehouses and logistics parks. With the number of companies offering services within airport complexes, development of office and lodging facilities in immediate proximity to the terminal also has good prospects,” holds Regina Lochmele, head of office and industrial real estate analysis at Colliers International.

Whatever Guests Desire

“Airport facilities and adjacent areas are favorable locations for shopping malls, entertainment facilities and hotels, catering to transit and delayed passengers,” says Vladimir Zhuravlyov, head of commercial real estate and investment at NAI Global. “Hotel complexes, retail and leisure zones, offices and showrooms are essential at an airport,” Andrei Zhamkin agrees.

Nowadays, there are several hotels operating at the city airports – Novotel at Sheremetivo, Aerootel in Domodedovo; Vnukovo runs two hotels – Aeroport and Ekipazh – catering to passengers and air crews respectively. The average occupancy rate at Novotel stands at 95%, Yevgeny Semyonov reports. Aerootel’s popularity is estimated at 110%. Vnukovo hotels are not far behind. All those airports plan to expand their lodging facilities.

“Hotel operators are interested in airports, given stable passenger traffic they generate. Moscow, in particular, and Russia on the whole are becoming attractive to international businesses. As a result, the number of business passengers traveling to and from Moscow is growing, as well as that of transit fliers en route to other Russian cities with a stopover in Moscow,” says Yevgeny Semyonov.

A new first class hotel providing 400 rooms is planned in Domodedovo; Vnukovo plans the development of a hotel, also rated 4 stars, within 150 meter distance from the passenger terminal. The 10-storied complex, measuring 30,000sqm, will have 443 rooms, restaurants, a beauty studio, a fitness center, a swimming pool, saunas, shops, conference facilities and an underground car park for 65 cars. Both projects are positioned as upscale hotels, although such approach is not always justified, experts are convinced.

“There are two types of hotel projects, which offer the best prospects: economy-class hotels for airport staff and airlines and business hotels rated 3 to 5 stars for transit passengers,” holds Andrei Zhamkin. “Moderately-priced 3-star hotels must be available within the airport zone or in the vicinity. Higher-class hotels target business passengers. 3-star accommodation could cater to tourists and transit passengers,” Yevgeny Semyonov says.

Deputy director for hospitality industry development at NG/CBRE, Stanislav Ivashkevich, says that depending on the intensity of passenger flow airports must offer a complete spectrum of hotel services, from cheap 2-star to luxury accommodation. Vladimir Zhuravlyov believes that a first class hotel would suffice. “Airport hotel rooms offer short-term accommodation, 4-star hotel development is most appropriate,” he notes. Such hotels operate in Sheremetievo II and Domodedovo.

“There is no need for five-star hotels. Construction of 3-star and first class hotels is far more profitable,” says Igor Golitsin. “That is convenient both for passengers whose flights are delayed and for airline companies who do not have to arrange for transfer of delayed passengers to city hotels.”

Shopping Upon Arrival

With terminals expanding, the number of airport shops and entertainment facilities operating in airport complexes grows. According to the market experts, tenants show keen interest in those properties. “Duty free shops have the best potential. Servicing intensive and stable passenger flows and designed to stimulate impulse purchases, those shops offer opportunities that attract retail operators. The presence of major anchors is not necessary,” says Andrei Zhamkin.

Russia’s first chain of duty free shops is Moscow Duty Free co-owned by JSC Aerofirst, Sheremetievo, Aeroflot and Irish Air Rianta, Zhamkin has reported. “Airports are unthinkable without retail zones. Those are, first and foremost, brand shops, luxury clothes and accessories boutiques. Duty free shops offer quality goods of famous brands at prices much lower than elsewhere in Moscow,” Igor Galitsin recalls.

Duty free shops have completely ousted retail chains and developers of large malls from the airports, says Yuri Taranenko, commercial real estate consultant at Miel. “There is hardly any sense in launching shopping malls near airports as buyer flow is limited while retail outlets operating within airport complexes fully satisfy the demand. For example, duty free shops operating in Sheremetievo II considerably undermine the chances of supermarket chains to succeed,” Taranenko says. “People who arrive at the airport simply don’t have time to visit a shopping center operating in the vicinity. They are interested mostly in gifts, foodstuffs, newspapers and magazines, or flowers.”

Vladimir Zhuravlyov says that certain categories of retailers are always welcome at airports. Those are chains selling clothes and accessories, as well as cinema chains, bowling alleys and amusement complexes, he says. “Other potential tenants are public catering companies, shopping arcades with small shops selling travel goods, souvenirs, offering services for travelers, such as car rentals, travel agents, web providers, mobile phone shops, health clubs and beauty studios,” Andrei Zhamkin adds.

Retail space at airports is extremely expensive, with shops let at rates comparable to rates charged in Moscow’s main retail corridors, Yuri Taranenko says. “The rent may go as high as $1,500 to $2,000 per 1sqm per year, according to experts’ estimates. It is hard to judge on their payback as those properties rarely enter the open market. At the same time, that proves that those shops are operated quite effectively,” he adds.

Airport City

Not all airports focus solely on the development of amusement and shopping facilities. Much depends on the specifics of each given airport, experts say. “The prospects of developing certain commercial properties on the premises depend directly on the functional purpose of the airport. For example, Domodedovo holds leading positions in cargo transportation services, which gives ground for development of office and warehouse facilities on its territory. East Line has announced plans to build a class A office complex Airport City. Sheremetievo and Vnukovo focus rather on passenger traffic, hence, the demand for shops and hotel facilities,” says Vladimir Zhuravlyov.

East Line’s ambitious project will provide along with office space all public amenities necessary for smooth operation of a full-fledged business center – the Domodedovo Plaza multiplex, a hotel, exhibition space, a logistics park, multi-level parking lots and a filling station. “The company will offer long-term leaseholds on condition of designated use and invite investors and developers to join the Airport City project. The bulk of income from those projects will be derived from the sale of leaseholds; projects will be run by operators hired by the company,” Regina Lochmele says.

“The demand for office space in Domodedovo is extremely high, especially considering its leading positions in passenger and cargo flow,” says Vladimir Zhuravlyov. Yevgeny Semyonov anticipates an increase in demand for conference facilities at airports, as business passenger flow is growing. Some companies, such as Regus, offering fully serviced and equipped office space across the globe, often ready-made offices to business travelers. “People arrive at the office and then fly back home. In airports offering a complete set of services, office and hotel space, a person does not even have to leave the airport area if he has arrived only for a day or two,” Semyonov adds. Other would-be tenants at Airport City are airline companies, travel agencies, etc.

Multiplex theaters, too, are bound to succeed. “Considering that none of the Moscow airports has a movie theater, such projects are simply bound to succeed,” holds Vladimir Zhuravlyov. It is worth noting that a 25,000-square-meter office project has been launched in the village of Melkisarovo near Sheremetievo Airport. However, the development will not enter the market. The new complex will house Aeroflot’s head office. But it is quite possible that in the future Aeroflot’s partners, too, will build their offices in the neighborhood.

A Part of the Crowd

The ongoing commercial development at Moscow airports is unlikely to have a strong impact on the market analysts are convinced. “Airport real estate as a segment of the market is more or less independent, with own target audience,” says Igor Galitsin.

Vladimir Zhuravlyov says that “those submarkets develop in line with the tendencies of the Moscow market. Nevertheless, even a considerable increase in supply of retail or hotel space at the airports is unlikely to tell on the Moscow market.” Andrei Zhamkin has reported that office projects within airport complexes are quite likely to satisfy the demand for office properties there, however, their share of the Moscow market will remain insignificant – 2 to 3%.

In the future, the ongoing development of airport facilities will generate demand for better road and engineering infrastructure, Yevgeny Samsonov says. “For example, Domodedovo services 14 million passengers per year, plus people who meet them at the airport. With passenger traffic growing, it will be necessary to improve transport accessibility, launch express train services, improve engineering infrastructure,” he says.

“Development of modern road infrastructure between airports and the city will boost appeal of those roads for developers in conditions of decentralization of commercial property market, Regina Lochmele says.